To short, or not to short? That is the question facing advisors
We all know that bulls make money and pigs get slaughtered. But bears make money too. The question often faced by financial advisors is whether they should join them.
As a rule, the trajectory of the market is upwards over time. Those who buy and hold long enough will inevitably make money as the economy grows. Amen to that.
Nevertheless, that profitable ride from lower left to upper right on your computer screen — as beneficial as it may be over the long term — is also never, ever smooth. It contains dips, both big and small, that are designed to send even the most risk averse investors to the relative safety of bonds, cash or their mattresses.
All that said, those market potholes can be profitable for those who time the market correctly. While often discouraged as un-American, selling high and buying low is still a valid recipe for making money. It just takes great care because the losses can be infinite, which is why most financial advisors are loathe to do it in the first place.
“When clients ask about shorting stocks, I let them know how it works, the cost on margin and that it needs to be closely monitored to be closed before it runs away from them. Frankly, in most cases I would suggest that they just sell or avoid the stock versus shorting it,” said Scott Bishop, managing director at Presidio Wealth Partners.
Bishop does at times employ inverse ETFs, which rise in value when the market drops. However, he does it primarily to protect clients from a major tax hits if they have large, low-cost holdings in the S&P 500 and are seeking to create liquidity.
“Many times the inverse ETF works well for a day or short-term trade, but it may not work perfectly for long-term holds due to roll risk when the underlying futures
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